What Exactly is a Health Savings Account?

As I have discussed in a previous newsletter, death comes for us all. As that wise man Optimus Prime once said, “fate rarely calls upon us at a time of our choosing”. In that spirit, we don’t know when the Grimm Reaper will come knocking on our door telling us the ferry to cross the River Styx is soon to board. So, let’s assume you are going to live a long life full of wonderful experiences and you will leave behind an army of people who love you.

Fantastic!

However, here’s the deal. As you get older, your body is going to breakdown. You don’t get to the keep that body you had in your early 20’s forever. Most likely, over time your eyesight will begin to deteriorate, you are likely to put on weight, your blood pressure is going to rise, as will your cholesterol levels.

When this happens, you are probably going to need some medical services and devices along the way. Since there is no such thing as a free lunch, you are going to need some money to pay for these goods and services. While Medicare was created to help senior citizens (65 years and over) get access to medical care since most medical insurance companies wouldn’t touch them with a 10-foot pole (thank you LBJ for establishing this program that millions of Americans rely on in their later years), it doesn’t pay for everything. The program still requires co-pays from its enrollees, so here is the question everyone needs to address.

When I retire, how am I going to pay for medical expenses?

Note: For the purpose of this newsletter, we will sweep the issue of Medicare’s projected insolvency (due to Americans living longer, medical costs increasing, and couples having fewer children) under the rug for now - just like the U.S. Congress!

The idea of paying medical expenses in old age has been front and center for me over the past several years. Without providing details to protect my loved ones’ privacy, I can tell you that I’ve been to assisted living facilities quite a bit in recent years. In addition, someone I care for deeply has been diagnosed with a disease that you wouldn’t wish on your worst enemy and for which there is no cure. While Medicare can cover a lot of costs, there is lot you will be on the hook for.

If you are reading this, there is a good chance your employer doesn’t offer you a pension. Hopefully you have a 401(k) to throw your savings into, and if not, you are using one of the many IRA options available to you. In addition, you will hopefully get some benefit from Social Security (assuming Congress makes some hard decisions to prevent the trustees cutting your benefits by 20% - see my previous newsletter “Winter is Coming…for Social Security” for more on this). All this being said, there is an option you can use to bulk up your savings for your health costs in retirement.

All Hail the Health Savings Account (HSA)!

A Health Savings Account (HSA) operates similarly to a 401(k) in that you can contribute money pre-tax (which lowers your annual federal tax liability) to an account. Once funds are placed in the account, you have the ability to invest your funds in a variety of mutual funds. Here the money can grow tax free until they are withdrawn. However, unlike a 401(k) where once the funds are withdrawn they are taxed, funds that are pulled from an HSA are not subject to federal tax as long as they are used for qualified tax expenses. Not too bad huh?

Now one thing you need to understand is that in order to benefit from an HSA, you must be enrolled in a high-deductible health insurance program. Unlike a standard PPO or HMO where you have a smaller out-of-pocket limit for medical expenses, with an HSA eligible plan you might be looking at a larger out-of-pocket maximum each year (think $5,000 for an individual and $10,000 for a family plan). So, in essence you are retaining more of the risk of medical expenses in exchange for lower insurance premiums.

Making Your Money Make Money for You

When I first enrolled in an HSA, I had my family covered in a standard PPO and we were also maxing out a flexible savings account (FSA). Once I made the switch to the HSA, I took the premium savings from enrolling in the high-deductible plan and threw all of it into the HSA as well as the money I placed each year in the FSA. My employer at the time also threw in $1,000 a year into the HSA to get it running, so all in my total cost to be in the HSA was about the same as when I was using the PPO.

I made the switch less than 10 years ago and I’ve been using an HSA ever since. Each year I max out the amount you can sock away (in 2023 its $7,300 for a family) and I try like hell to not use the HSA. Specifically, if the medical expense is less than $200, I do my best to pay using funds in my checking or savings accounts. It’s when expenses get bigger (like $500 or more) I will use the HSA.

When it comes to the funds in the account, I will typically keep about $3,000 in cash and the rest I invest in low-cost index funds (60% US stocks, 20% international stocks, and 20% US bonds ). Like investing for your retirement, it’s important to keep your mind on your long-term needs and avoid the daily “noise” that could distract you from your objectives.

If you are decades away from retiring, what do you care if your portfolio drops 20% in a year? Over the 40+ years you will be working before you are likely to retire, remember that markets have a tendency to go up and to the right over the long haul.

Need an example of how this could work for you? Look at the following table.

In this example, we assume you are maxing out your HSA savings for a family (which is likely to increase each year to keep up with inflation), you have some expenses each year that you pay with the HSA, and you are earning an average return on your portfolio of 8% (which is in line with the portfolio I use). As you can see, the longer you stay with the HSA and do your best not to spend your funds, the balance can increase pretty quickly. The great thing is once your balance exceeds your maximum out-of-pocket for the year, then you know if the worst-case scenario happens you are covered. Once your balance gets to four times your annual maximum out-of-pocket, now you are playing with house money!

Don’t think my example is realistic?

It’s a rough approximation of what I've been doing with my HSA the past nine years. That ending balance in Year 9?

It’s in the ballpark of my current HSA.

If I can do it, so can you.?

Your future, retired version of yourself will thank you for it.

Et al...

Review: Twilight Imperium (4th Edition)

So, as you may recall from my newsletter in December of last year, we talked about the increase in popularity of board games and how it's become a $12 billion industry. In that newsletter, I also gave you a couple of recommendations for some games to check out. Since that time, my wife and I have added some more games to our collection. A couple I still haven't figured out since some games can be rather complex. Once I get them figured out, I will make sure to give you my thoughts.

When it comes to board games, my favorite types involve strategy and conquest like the game Risk (shocker, huh?). While I enjoy this game, I've always been on the lookout for a game that turns it up to 11. Something not just involving conquest, but also weaving in some diplomacy, trade, and politics. You know - international affairs in a game setting.

Well, it turns out there is a game that fits this description. It's?called Twilight Imperium and it's been around for a number of years. In fact, the publishers (Fantasy Flight Games) released its fourth edition several years ago. The best way to describe it is to take the games of Risk and Diplomacy, merge them together, and set it in space.

Recently some neighbors of ours invited us to play the game with some of their friends. Fortunately, all of them played before so they gave helpful tutoring along the way. In our game, we maxed out the number of players at six. We were warned that the game can take longer when you play with six players and if some of the players are new.

So, we walked over to our neighbor's house at roughly 9:30 AM on Super Bowl Sunday and started playing around 10AM when the last of the players showed up.

How long did the game take?

We finished just when the 2nd half of the Super Bowl started.

Yep - we played for about 8 hours straight only pausing for a pizza lunch!

I think I know your next questions. Was the game fun? Was it worth the time? I can answer both questions by saying "yes". Now let's be clear - the game is complex. The rulebook is about 25 pages long. Before you begin the game, you need to choose 1 of 17 civilizations. Each one has unique attributes and depending on which one you pick (as well as which ones your opponents pick) will influence your strategy in the game.

In the end, I didn't win. In fact, I came in last. However, the more we played the more comfortable I got with the rules. There is definitely an ebb?and flow to the game. The overall winner isn't based on who conquers the galaxy but is based on who earns ten points first. There is a variety of ways to earn points, so it's not about winning battles one after another. The game has layers.

The game has an 8.6 Board Game Geek rating which is the highest rating of any game I've reviewed so far. I would be down with playing again. However, I plan to do some research on-line to find some strategy guides so next time I'm better prepared.

I'm not a fan of coming in last.

If you enjoy what you've read here and you think I might have a clue what I'm talking about, then please reach out to me if you would like me to present to your firm or organization. I have experience talking to professional organizations, trade conferences, as well as universities. I've also appeared in newspaper articles and podcasts. Also, I'm available for birthdays and bar mitzvahs.